For-Profit Colleges Score Victory With Judge's Ruling

07/03/2012

Leaders of for-profit colleges are applauding a judge's ruling overturning a main component of federal regulations that would have penalized the schools for graduating students with substantial debt and little chance of getting a job in their field.

The rules, set up by the Department of Education, sought to rein in lending to students attending schools that had a history of graduates who failed to repay loans in large numbers or who faced debts they were unlikely to be able to repay. The judge found the thresholds to be arbitrary.

"No one is suggesting that anyone ought to have a free pass, but there are appropriate standards in place already," said Steve Gunderson, president and chief executive of the Association of Private Sector Colleges and Universities, which was the plaintiff in the case. "If there's a particular school that has a problem, then deal with that school but don't [come down] on the entire sector."

The group sued after the Department of Education sought to impose regulations that could have caused some for-profit schools to lose eligibility for federal loans in 2015. The rules would have required that a school meet one of three requirements for three of four years, or lose access to federal student aid: at least 35% of recent graduates are repaying their loans; loan payments eat up no more than 12% of graduates' average annual earnings; or payments consume no more than 30% of graduates' average discretionary income.

Judge Rudolph Contreras, of the U.S. District Court for the District of Columbia, said the debt measures "lacked a reasoned basis" and called them "arbitrary and capricious."

The Department of Education said 48% of for-profit institutions failed to meet the 35% repayment rate for recent graduates. Among public and nonprofit institutions, only 18% of schools fell short of the same measure. But Judge Contreras said the department didn't explain why it had chosen those thresholds other than to indicate they had been hashed out through negotiations.

Sandy Baum, an economist at Skidmore College whose research laid the groundwork for the proposed rules, said the department's regulations set the bar very low but the judge had created an impossible threshold because "there is no one right measure," she said. "It's a continuum and it's a question of where do you draw the line," she added.

For-profit colleges generally attract poorer students and offer more-expensive courses than their public and not-for-profit rivals. As a result, they tend to graduate students with higher debt than those institutions, according to the College Board Advocacy and Policy Center, an arm of the College Board, whose membership includes not-for-profit private and public colleges.

Among students who received bachelor's degrees in 2008, 53% at for-profit schools owed $30,500 or more, compared with 24% for private schools and 12% at public schools.

Among all career-training programs—including for-profit, not-for-profit private and public—35% met all three metrics, 31% met two and 29% met one, according to the Department of Education. The remaining 5%—193 programs across 93 different schools—didn't meet any. Several for-profit schools that didn't meet all of the department's requirements didn't respond to requests for comment.

University of Phoenix, the nation's largest for-profit college, said it "supports meaningful transparency and accountability across higher education. Regardless of the court's ruling, we remain firmly focused on our mission of providing a flexible, relevant and quality education to nontraditional students and working learners."

In his ruling, Judge Contreras noted the need for transparency in the for-profit-college sector. He said for-profit schools have the responsibility to disclose their on-time graduation rates, tuition and fees charged and median debt of graduates.

The Department of Education worked on the regulations for three years and took more than 90,000 public comments before issuing them.

Peter Cunningham, a spokesman for the Department of Education, said Monday that the department was pleased the judge "explicitly upheld our authority to regulate. He also sent a strong signal that this needs regulation."